For the normal functioning of the company, it always needs sources of financing. In addition to its own assets, borrowed funds, such as loans from third parties, can also be used. However, each of the borrowers has the right to set their own size of interest rates on loans, which complicates the assessment of the cost of loans of the organization. It is in such cases that such an indicator as the weighted average interest rate on loans is used.
The concept
The concept of a weighted average rate can be interpreted in different ways based on the level at which it is applied. For example, if we are talking about a specific financial institution, then the average rate on loans is the average indicator of the value of all loans (both issued and received). In other words, the average cost of a loan portfolio of an individual bank. This indicator is considered within the organization to analyze the effectiveness of its financial activities.
If we consider the weighted average interest rate at the level of the entire banking system, then this term means the cost of loans taken and issued by all banks of the Russian Federation. It is used by the Central Bank to study the effectiveness and success of the banking system of the country as a whole. In addition, the weighted average interest rate on loans of the Central Bank of the Russian Federation can be used as a criterion for assessing the dynamics of promotion of a unified credit policy of our state.
Types of loans
The calculation of the average interest rate arose due to the need to conduct a general financial analysis of the organization. But using the simplest indicator ( arithmetic average ) it is impossible to make such calculations, since credit organizations work with different types of loans that are issued at different interest rates.
Credits are:
- long term;
- short term;
- investment;
- negotiable.
Also, the weighted average interest rate can be calculated by the Central Bank separately for individuals and legal entities. These metrics are available for general use. For example, the weighted average interest rate on loans for individuals for a period of over 365 days in December 2016 amounted to 15.48%.
Why calculate the average cost of loans?
For the stable operation of banking organizations, they need to control their own liquidity. Liquidity is a real opportunity for assets to become easily circulating cash. This means that an asset is considered liquid if it can be sold at a market price in the shortest possible time.
When, in analyzing current activities, a financial institution discovers that it is excessively liquid (has many liquid assets), it needs to issue as many interbank loans as possible. Conversely, when liquidity is low, banks are forced to raise assets on the side.
Interest rates on loans for individuals and organizations are directly dependent on the golden rule of "supply and demand". Therefore, the Central Bank of the Russian Federation constantly monitors the volume of credit operations by calculating the weighted average interest rate on loans. This makes it possible to quickly respond to changes in the financial market and, if necessary, reduce or increase the level of interest rates on interbank credit operations.
What is included in the assets of banks?
To assess the liquidity of a bank, you need to know what is included in its assets. Bank assets are the organization’s resources that belong to it. Moreover, she has the right to dispose of them at her discretion. Bank assets include:
- equity;
- fund balances on settlement accounts of individuals and legal entities;
- funds in deposit accounts of organizations;
- bank deposits of individuals;
- interbank and other loans.
When a bank falls out of balance and becomes excessively liquid, it simply loses its profit. Since free funds can be invested and receive from them a certain percentage of profit. However, during the time when the money simply lay on the accounts, they did not work, but lay a useless load.
The formula for calculating the average interest rate on a loan
In order to correctly calculate the average cost of a loan portfolio, organizations use a special formula that is significantly different from a simple arithmetic mean. Since the cost of a loan depends not only on its interest rate, but also on its amount.
This formula is as follows:
ATP = ∑ (K * P) / ∑K, where:
- ATP - weighted average interest rate;
- K - loan balance;
- P - interest rate.
Calculation example
To make it clear how to use this formula, you need to apply it in practice. Suppose an organization has three loans:
- in the amount of 15 million rubles at 10% per annum;
- in the amount of 10 million rubles at 8% per annum, while the organization has already paid 8 million rubles to the creditor;
- in the amount of 2 million rubles at 15% per annum, with a residual loan amount of 1.5 million rubles.
Knowing the formula, you can find out that the average interest rate on loans provided by the company is equal to:
ATP = (15 * 0.1 + 8 * 0.08 + 1.5 * 0.15) / (15 + 8 + 1.5) * 100% = 0.097 * 100% = 9.7%
In this case, the weighted average rate may change if:
- the company will receive another loan;
- the interest rate on any of the current loans will change;
- the company will make full or partial repayment of loan obligations.
The weighted average interest rates on loans in rubles are similar to foreign currency loans. But since the analysis of financial activities is carried out only in national currency, it is necessary to take into account the Central Bank rate at the time of assessing the loan portfolio.
How to reduce the average interest on loans?
In order to maximize the use of borrowed funds, it is necessary to keep the average interest rate at the lowest possible level. To do this, you must adhere to some rules:
- Take loans only at the lowest interest rate.
- First of all, repay loans with the highest interest rates.
- If the interest rate has increased during the loan term, you need to restructure or refinance the loan.
- Draw up a debt repayment schedule, taking into account the fact that at the end of the term only low-interest loans should remain open.
The weighted average interest rates on loans provided by credit organizations within one enterprise should be kept under constant review. This will make it expedient to manage the company's resources and maintain maximum efficiency of its work.
The same rule applies to the cost of all credit resources in the country. Indeed, the performance of the entire financial system of the state depends on the weighted average interest rate. However, this responsibility will be left to the Central Bank, which does an excellent job of it.